Goldman Sachs upgraded its rating on global equities to “overweight” on prospects of economic growth and recovery in manufacturing activity, after starting the year with a “neutral” rating across assets.
Recent data has shown signs of improvement in global manufacturing activity, including in the United States, and market participants will assess incoming economic data to determine the trajectory of interest rate cuts of major central banks.
“We expect growth to become a more important driver of risk appetite and equity/bond correlations should be more negative this year,” Goldman said in a note dated Feb. 16.
The brokerage added that monetary policy easing cycles have historically been supportive for risky assets but may be less so this year, “as markets have already pre-traded much of the rates relief.”
Traders see about a 51.3% chance for the U.S. Federal Reserve to cut interest rates by 25 basis points in June, according to the CME FedWatch tool.
However, the potential for global earnings growth remains ‘relatively muted’ due to falling revenue growth and minimal room for margin improvement, Goldman said, although adds that global economic growth creates ‘upside risks’ to earnings growth.
“While equities have digested higher bond yields so far with better growth, there is a risk of shifting back to a ‘good news is bad news’ regime,” Goldman cautioned.
The brokerage also downgraded global credit assets to “underweight” from “neutral.”
“Tight credit spreads are likely to become a speed limit to returns,” the brokerage noted.
Goldman reiterated its “neutral” rating on longer-dated global bonds and commodities.
Goldman Sachs raised its year-end target for the benchmark S&P 500 to 5,200, reflecting roughly a 4% upside from current levels, citing an improved earnings outlook for the index companies.
The brokerage had previously projected the index to end 2024 at 5,100, before raising the forecast from 4,700 in December, on cooling inflation and expectations of the U.S. central bank easing rates in the year.
Goldman on Friday forecast an 8% profit increase for S&P 500 companies this year, fuelled by an improved U.S. economic outlook and stronger mega-cap profit margins.
“We expect strong world GDP growth and a slightly weaker dollar will support EPS, while lower rates and lower oil prices will be a slight drag,” said David Kostin, lead strategist at Goldman Sachs.
Kostin expects the earnings strength of mega-cap stocks, especially those in the Magnificent 7, boosting aggregate S&P 500 profits in 2024. The growth in artificial intelligence and consumer strength is expected to propel revenue growth alongside margin expansion, Kostin added.
He expects the Magnificent 7 stocks to post the strongest earnings growth among S&P 500 sectors.
For the rest of the index, operating margins should also improve, but to a “much smaller” degree, as input costs, such as wage growth, continue to moderate alongside robust sales growth and only modest further price disinflation, Kostin said.
The MSCI world stock index overcame a 1.1% dip early in the week, driven by a higher-than-expected U.S. inflation reading, to hit a new two-year peak of 752.55 on Friday.
The U.S. equity funds received $6.78 billion, the biggest weekly inflow in seven weeks.
Investors also purchased about $1.74 billion worth of Asian equity funds but sold European funds of a net $151 million.
Among sector funds, tech received $2.66 billion in a fifth successive week of net buying. Industrials and consumer discretionary sectors also drew about $277 million and $242 million, respectively.